EBITDA: definition, calculation and use in corporate finance

Definition of EBITDA

EBITDA measures the operational performance of a company before taking into account financial (interest), fiscal (taxes), and non-monetary (amortization and depreciation) elements. It represents what the company generates in wealth from its current activity, independently of its financial structure and its accounting choices.

Calculation formula:

EBITDA = Net profit + Taxes + Net financial charges + Depreciation and amortization charges

Or equivalently:

EBITDA = Turnover - Operating expenses (excluding depreciation)

Why is EBITDA so used?

EBITDA is popular with investors and analysts for several reasons.

It is comparable between companies: By neutralizing the effects of financial structure (debt) and depreciation policies (which vary depending on accounting choices), EBITDA makes it possible to compare the operational performance of two companies independently of their capital structure.

It is a proxy for cash generation: EBITDA is often used as a proxy for a company's ability to generate cash. This is why valuation multiples are often expressed as a multiple of EBITDA (e.g. 'the company is valued at 8x EBITDA').

It is used in banking covenants: Banks often include clauses (covenants) in their loan contracts that impose a minimum net debt/EBITDA ratio.

EBITDA vs EBE: What is the difference?

L'EBE (Gross Operating Surplus) is the French equivalent of EBITDA, but there are calculation differences depending on the accounting standards used (French standards vs IFRS). In practice, the two terms are often used interchangeably, but it is important to clarify which definition is used when making comparisons.

How to interpret EBITDA?

Positive EBITDA means that the company is generating value from its operational activity. Negative EBITDA is a warning sign: the company is consuming more resources than it generates.

The EBITDA margin (EBITDA / Turnover) is an indicator of operational profitability. An EBITDA margin of 15-20% is considered good in most industries. SaaS companies often aim for margins above 20%.

One Fractional CFO can help you calculate and interpret your EBITDA in the context of your industry, and identify levers for improvement. To learn more about other key financial indicators, see our definition of BFR.

FAQ - EBITDA

Is EBITDA a reliable indicator? EBITDA is a useful but imperfect indicator. It does not take into account the investments necessary to maintain the production tool (maintenance capex), nor the need for working capital. For a complete analysis, it must be supplemented with free cash flow.

What is a good level of EBITDA? There is no universal level. EBITDA must be interpreted according to the sector of activity and the stage of development of the company. A growth-stage startup can have negative EBITDA while still being in good financial health.